Airline Deregulation Comes Back to Haunt

ByHobart Rowen

March 14, 1982

Freddy Laker, the hustling British entrepreneur, and World Airways have discovered that deregulation isn't everything it's cracked up to be. They slashed transoceanic and transcontinental fares, once regulations were removed in 1978, only to discover that the big boys in the industry met the competition and forced them to the wall.

Freddy Laker went belly up. And president Ed Daly of World Airways, one of the principal advocates of deregulation--which for a time allowed it to prosper--has now asked the Civil Aeronautics Board to regulate the fares again because rate wars have become "disastrous and completely irrational."

It's a sensitive issue that will separate the theorists from the pragmatists. When does the operation of the so-called free marketplace become predatory?

The purists are hard to dissuade. Alfred E. Kahn, under whose guiding hand as CAB chairman most of the airline deregulation took place, told this reporter after the World Airways petition for relief that "it's sad, but Ed Daly has just got to take his licks."

The Reagan administration views it the same way. Economic Council Chairman Murray Weidenbaum, long a passionate deregulator, said in a brief interview that "I am not at all enamored by Daly's position. I have always been taught that we have a profit and loss system. The success of individual companies is not a concern of the marketplace--there is no assurance that any particular company is going to survive."

Kahn concedes that it may be "too bad" that the established companies like Pan American or United Airlines can drive new entrants like World Airways or New York Air to the wall, or actually out of business by meeting or undercutting the competitive price. But he says there is nothing that can or should be done about it.

"It's destructive and it's cruel, but that's the way the market functions," Kahn says. "There is in fact excess capacity because of the recession, and the market is adjusting to the decline in air travel in this way."

The excess capacity has hit with greatest force those routes using the big, wide-bodied jets. The market for used jet planes has dried up so completely that--perversely--it has kept some airlines going that are in technical default on their bank loans: in at least one important case, if the banks could sell the planes, they'd shut the airline down.

Kahn argues that deregulation in the past three years has brought travelers a lot of great bargains, allowed the lines the most efficient use of their equipment, and "exerted strong downward pressures on inflated wages." But there have been no bargains for smaller cities where fares have been boosted, and service reduced in frequency and in quality (fewer jets). And there will be no benefit to any segment of the flying public if the "bargains" on longer routes between big cities disappear once competition is extinguished.

Shouldn't there be any restraint on destructive competition? Both Kahn and Weidenbaum say "no." The CEA chief says: "Let the market function." Kahn warns against a return to "cartelization." But with some reluctance, the former Carter aide agreed that "if I saw a pattern of (the big airlines) cutting their prices, driving the others out of business, going up in prices, and again undercutting prices (if newcomers entered the field), maybe it becomes an antitrust matter."

But Daly naturally doesn't want to wait until others have driven World Airways and then some new generation of competitors into bankruptcy (if any are foolish enough to try again). So he's asked the CAB to prohibit fares that fail to cover actual costs.

He says transcontinental fares at $99 "are too low, and I will not remain silent, even though our proposal may offend deregulation purists." World charges $139--a rate that most of the better-known lines have undercut by $10.

Recently, New York Air, another upstart, tried to break into United Airlines' New York-Cleveland business, where the one-way fare was $125. New York Air brought it down to $69, with an off-peak rate of $39. United matched those fares, and is offering free mixed drinks, to boot. Kahn concedes New York Air has been placed "in a dangerous position."

It probably would be difficult for the CAB to arrive at an exact measurement of "costs," in line with World Airways' request. But some common-sense approach could be figured out that would prevent deregulation from becoming, in effect, a hunting license that enables established companies to pick off the competition. Anti-regulation purists like Weidenbaum won't agree, but an untrammeled free market is not necessarily synonymous with the public interest.